Amazon.com
reported ever widening losses today ($185 MM).But revenue shot up to $676 MM last quarter, 3X
last year’s holiday period.In after market trading, the stock has gone, are you ready
for this,… up.{Sigh}At first blush, the gigantic jump in revenue is
impressive.But
any retailer knows that revenue is not the important
number.It’s
the margins that you make on the sale.Then throw in your S,G & A and hope your profit is still
positive.Jeff
Bezos knows this.That’s
why he laid off 200 people this week.And he vowed to stop the red ink.Jeff is getting back to basics, because the
market should start to pummel him if he doesn’t start
making money.

Value
America and Beyond.com fired staff and announced major
restructuring and re-positioning this month.Buy.com, the retailer that sells below
cost is now allowing prices to creep back up on all but
the hottest items.Well, duh.Your
neighbourhood Safeway has been selling milk cheaper
(near or at a loss) than the 7/11 to get you into their
store to buy other higher margin goods.And they have been doing this for 50 years.Holy new economy, Batman, the on-line retailers
are getting back to basics!

The
dotcoms are suddenly ice cold in the IPO market and VCs
are less and less inclined to fund Golfballs.com {oops,
sorry, someone funded that in early January}.The bloom is off the tulips.Time to get back to a workable business model and
a predictable revenue model.Don’t get me wrong, the first movers in the
on-line retailing space made a fortune in the stock
market and deservedly so.They staked their claim and branded the 50 MM or
so of us that used the Net before 1999.And, they will undoubtedly find the right model
to make vast profits in the future.But they will have to get back to basics.

The
initial run up of consumer focused e-commerce on the Net
has produced new business and revenue models from the
ridiculous to the sublime to the familiar.We’ve had advertising-supported content,
affiliate marketing, the rise of the various auction
types, the group buying and name your price models, the
aforementioned sell at less than cost and many, many
more.There
has been a huge new world opened to all of us with
seemingly unlimited potential.But as the B2C e-commerce industry matures, the
reality is that, whatever your funky method, it has to
make money.

In
start-up world, there is a strong movement to sane
business propositions again.Despite the jaw-dropping amount of capital being
raised for VC in the US and Canada, there is no mad rush
to fund companies that say, “We have a team and an
idea.The
business model is evolving.We’ll figure it out as we go.”Eighteen months ago in the e-commerce space, it
was de rigeur.

I
mean, you would expect that if there was an oversupply
of capital that increasingly dumb deals with no hope of
success would be funded.And there will be a few stinkers. But, the
sophistication of the investors and the entrepreneurs
has increased along with the supply of capital.Very smart entrepreneurs with great ideas are not getting
funded in a microsecond as you may think (For more on
what to do when you are turned away by an investor, see
my last column).

What
are the investors looking for now?The discriminating investor, with an eye on an
increasingly unstable public market, might want to see a
well thought out revenue model right out of the gate for
any form of e-commerce deal.Consumers, being much more fickle and much more
expensive to get and keep loyal, are becoming an
anathema.That’s
why B2B has been hot for the past 8 months or so.Businesses, post Y2K, are much better and more
reliable customers.So, if you have an idea for selling to businesses
or helping businesses sell to each other or helping
businesses buy their supplies, you will have an easier
time demonstrating a workable revenue model to an
investor.

The
arms dealers are hot again.The e-commerce build out has rekindled the idea
of making a piece of software (or piecing together other
pieces to form a complete solution) and selling it to
companies to make them more productive.A couple of years ago, if you said enterprise
software or middleware to a VC, they would run
screaming.Tools
were not hot and the new Net language, Java was
fizzling.Now,
say XML and they start shaking their pen to see if the
ink is ready to flow.Why?Yeah, you know, back to basics.If I make a toolkit or pieces of code that make
your company more productive (there’s that selling to
business thing again) then you will pay me for it.There is a revenue model.

Bandwidth
enhancing hardware and software is red hot.Yup, still is.The build out of the Net ain’t anywhere near
over yet.We
even have a whole new world opening up with wireless,
fixed and mobile.We all want it faster and we want it cheaper.Imagine going back to 1994 and looking at the
world with a slightly more thoughtful eye once again.The Internet was just catching on to the
mainstream.It
had every indication of being absolutely huge.None of the new business models had been dreamed
up yet and more people thought it was interactive TV’s
precursor.But
one thing was for sure, the guys building the pipes and
the boxes at the end of those pipes were going to make a
fortune, no matter what was carried over the Internet.Seems so easy in hindsight.“Sell the house Ethel, we’re buying Cisco
shares!”If
Warren Buffet’s so smart, why didn’t he… oh, never
mind.

Let’s
recap.The subtle shift for investors these days is back to
companies that know how to create revenue models that
make economically rational sense.Having said that, there are still nascent
industries, like wireless data, that haven’t sorted
through all of the possible business models yet.You could throw money at a momentum building
company in this space, out to create a brand, and hope
that it figures out the right model.There’s still time.But, eventually, that window will close too.

There
will always be opportunities in maturing industries to
make money.Clever
people will come up with quantum leaps in technology to
serve existing marketspaces.The “follower” strategy can make
entrepreneurs and investors a fortune if they execute
properly and leverage their “unique” advantage over
the incumbents and take away market share.My point today is that investors may need a lot
more convincing to enter a market that is maturing vs.
one that is wide open.Make sure that you understand these dynamics as
it relates to your business proposal.You might need to reassure the VC that you are
getting back to basics.

Random
Thoughts –

-
The BC Early Stage Technology Index (BC ESTI) is at 8
out of 10 today.I
remain quite bullish on the early stage entrepreneurs
around here, especially given the recent swath of
“optionairres” (as Peter Ladner put it) at Pivotal
and Creo.February
means that all the year end bonus cheques are cashed and
people are looking for new adventures.Canada is becoming world reknowned for its
wireless technology and international investors are
arriving to see what the next Sierra Wireless or 724
Solution might be.I am not looking forward to the budget of Paul
Martin.This
could knock my ESTI down significantly if there is no
serious tax relief.

Letters
From Last Column:

Hi
Brent,

I've
been paying indirect attention to the
VC/Angel/raising-money-in-general situation both because
I've some personal projects that I want to do and also
because the more I know about everything the less likely
I'll be tripped.

Your
column really highlights the difference between the
creator dreaming of the project the company wants to
make and the financial structure that's needed to make
the dream happen.Too
often, people get

terrific
ideas and think/hope they've thought of it first (this
has happened to me far too often), then expect money
people to jump aboard because of the emotion generated
by a terrific idea; the thought of being responsible for
someone's investment, professional or private, isn't
part of the equation most of the time and should be.

The
other half of this is that, once again, the government
is supposed to save us all from our folly....which is
ironic, given that the government's house is far from
orderly and is about ten years behind the rest of
society (if not more).

There's
a huge amount of emotional/psychological madness today
in maintaining a dream through the tunnel of raising
capital, especially in the IT sector, where conditions
change weekly (if not daily).Keeping up with THAT will likely require
hospitalization by the end of the journey.

While
I understand the need to have solid management/financial
structuring for attracting the attention of people
who'll (hopefully) invest, there's an equally difficult
struggle in maintaining a dream - semi-intact - over the
course of raising that funding....which assumes that the
same people are doing the creative/financing.

Looking
forward to your next column,

Roger
Brown

Roger:

Raising
money is the hardest thing you can do in business.You quickly learn that people may show interest,
but it doesn’t mean they will invest.I’m acutely aware of the agony of waiting for
an e-mail or a phone call just to show some progress.How many times will you pencil someone in and
then have your hopes dashed as they pull out late in the
game.It’s
a roller coaster of highs and lows.Doing it alone requires incredible emotional
stability.Doing
it with a team requires that at least one of you be able
to pull the others out of a funk or pull the others off
the ceiling.And
everyone wants to give you advice.You may become so discombobulated in
incorporating everyone’s thoughts that your own dream
becomes incoherent to others.Keep the core dream the same and stick to your
key messages.Fine
tuning will be needed, but major changes mid fund
raising are usually fatal.Great letter.

What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).